When Microsoft Corp. bought Hotmail Inc. for $395 million two years ago, the free-e-mail pioneer had 10 million members and ran on mighty Unix computers--not PC servers powered by Microsoft's Windows NT operating system. Now, with Hotmail boasting more than 50 million accounts, the key parts of the site are still running on Unix--in spite of Microsoft's desire to switch to its own software. Even more embarrassing: Hotmail founder Sabeer Bhatia, who left Microsoft last March to start his own e-commerce-services company, Arzoo! Inc., is relieved to once again use 100% Unix. "I'm out of Microsoft now--so no NT," he says with a smirk.
Poor Microsoft. While the software giant is the dominant force in the PC industry, it has a long way to go when it comes to providing the technology underpinnings for the Web. That makes the company vulnerable: Increasingly, corporations are spending their technology dollars on Internet-related products rather than traditional software. In short, corporate computing is fast becoming Web computing. In this new world, Microsoft is playing catch-up with competitors such as Sun Microsystems Inc. For example, Microsoft's share of the market for Web-site server software is a modest 25%, according to survey company Netcraft Inc.
BILLION-DOLLAR BABY. For Microsoft, the stakes are huge: The total market for corporate infrastructure software is expected to top $56 billion in 2002, according to International Data Corp. If the Redmond (Wash.) giant is to hold on to its spot as the world's most valuable company, with a $600 billion market cap, it has to take the lead in providing a foundation for Internet computing. Chairman William H. Gates III wants nothing less than a sweeping victory. His strategy is to create a virtual Web operating system--call it Windows for the Web--that's as vital for corporations, tech companies, and consumers as Windows is on the PC. "This is life itself to Microsoft. We either do this or we shouldn't do anything," says President Steven A. Ballmer. The ultimate goal? "We hope to have a strong position--like with Windows."
The first step in Microsoft's Web plan is Windows 2000, the company's most important product update since Windows 95. Scheduled for release on Feb. 17, the operating-system update for corporations took four years to complete and cost Microsoft more than $1 billion to develop. It includes an update to the Windows desktop, but the important changes are in the version for server computers, which manages corporate networks, runs applications such as accounting or e-mail, and serves up Web pages from company sites. It offers zippy new features including directory services--which lets corporations keep track of every employee, computer, software package, and even each scrap of data in one place. It's easier to set up than previous versions and doesn't crash as often. Perhaps most appealing, a server computer running Windows 2000 can be as little as one-third of the cost of a comparable Unix system. An even more potent version of the software is scheduled to be introduced in August.
No question, this is a big leap forward for Microsoft. The new operating system should help the company grab market share in the high-end corporate and Web computing markets, although Unix is expected to remain the mainstay for many years. The company's share of the server software licenses sold is expected to climb to 43.5% in 2002, compared with 38% now, according to International Data. That should help Microsoft's revenues soar. Neil J. Herman, an analyst at Salomon Smith Barney, is predicting that Windows 2000 for PCs and servers combined could bring in $20 billion in revenues over the next three years--in large part due to upgrades of the desktop version. "There's going to be mass adoption," says Herman, who expects Microsoft's net income to surge 25% for the fiscal year ending in June, 2001, to $11.5 billion.
And Windows 2000 is just the beginning of Microsoft's Web strategy. In the next two years, Ballmer says, the company aims to deliver something much grander. It's readying a set of services designed to manage individuals' computing experiences whether they're at the office, on a business trip, or at home--using a PC, mobile device, or interactive-TV appliance. These services, to be sold to corporations and consumers, will do everything from storing files and data to bringing together and analyzing information from a wide variety of sources to automatically arranging appointments with business colleagues or friends. The company is working on improvements to the browser, Windows, and server application software to make all of this possible. "It's a version of Windows that lives on the Web and all users share," says Ballmer.
But Microsoft's vision may be tough to realize. The company is unlikely to be able to repeat the dominance it has in the PC market on the Net. Web-site operators and developers tend to be wary of the software giant. Many of the hot applications are built with Unix in mind. For instance, only 5% of the e-commerce software that BroadVision Inc. sells runs on Windows. And its competitors are ferocious. The AOL-Time Warner merger doesn't harm Microsoft in this sphere, but Sun, Oracle, and IBM are every bit Microsoft's match in corporate computing and are all vying to provide the basics for Web computing. "Many companies will succeed, rather than one dominating the marketplace," says analyst Chris Shilakes of Merrill Lynch & Co.
Perhaps the biggest problem is that, on the Internet, it does not matter so much anymore what operating system people use. Browsers and Web sites are built on standard technologies, so people don't have to rely on
Microsoft and its Windows operating system to assure compatibility between machines and programs. "The Internet itself is now the operating system, and Microsoft doesn't own it," says Kevin Harvey, a general partner at venture firm Benchmark Capital in Menlo Park, Calif.
Not that Microsoft isn't trying. With $19 billion in cash on its balance sheet at last count, the company can afford to open its fat wallet to curry favor with developers, customers, and technology partners. The software giant spent $9.9 billion on equity investments and acquisitions alone last year. The biggest was its $5 billion investment in long-distance giant AT&T--to which Microsoft hopes to sell millions of copies of its interactive-TV software. Hardly a month goes by without a new deal popping up. Just last month, Microsoft invested $200 million in electronics retailer Best Buy Inc. in exchange for Best Buy's promoting MSN Internet access services and building its new Web site with Microsoft technology.
TARGET: DOT.COM. Windows 2000 is Microsoft's heavy artillery in the Web market, though. Web sites and corporate Web applications still need to run on servers, and Microsoft designed Windows 2000 to do a host of new things that are vital on the Internet. Besides being more reliable than Windows NT, it's capable of handling extremely demanding computing tasks such as order processing. The Data Center Inc. version of the product, due out within six months, can be tuned by computer makers to run on machines with up to 32 microprocessors--satisfying the needs of all but the most demanding Web operators. And four machines can be clustered together to prevent the service interruptions that are disastrous for Web sites.
To gain credibility and hasten adoption of Windows 2000, the company recruited more than 100 customers who started up new computing projects on 1,500 servers even before the product's official launch date. Already, some of Microsoft's joint development partners have used the test version for crucial Web projects. Barnesandnoble.com Inc., for instance, handled its warehouse and order-fulfillment operations without a hitch during the holiday rush with Windows 2000. "We couldn't have handled the volume without it," says Gary King, the Web site's chief information officer.
And with the Windows 2000 launch on Feb. 17, Microsoft soon will make a sales pitch you can't avoid. The company is spending $200 million-plus to blanket television, print, and Net outlets with an ad campaign designed to steal IBM's thunder as the most trusted e-business company. Following the lead of Sun and others, Microsoft is setting up a 100-person sales team that will target dot.coms and corporations embroiled in e-engineering projects. Startups also will get spots in Microsoft booths at trade shows to show their products and will get discounts on advertising.
The company isn't neglecting the world's 6 million programmers, either. About half of them already are dedicated users of Microsoft's Visual Basic programming tool, and now the company is trying to persuade them and a host of Web-site developers to use its array of tools for Internet projects. A new generation of Microsoft programming tools, due out this year, is supposed to help developers stitch together an individual's favorite Web sites into a single personal portal--mixing and matching information from different sources.
This kind of cross-site programming has already shown up in a rudimentary way on Microsoft's MSN Web portal. Late last year, the company introduced Microsoft Passport, the first of its "megaservices," which allows consumers to fill out sign-on and payment forms once and then use them on other Web sites. So far, there are more than 100, from buy.com to Costco Online. Next up: parental consent, calendar, and community chat services that can be shared among Web sites. "Frankly, over time, all the things we do with MSN will be offered to others," says Yusuf Mehdi, marketing director at MSN.
GROUNDWORK. To make its MSN services even more attractive to other Web sites, Microsoft is becoming the Daddy Warbucks of the Internet world. For instance, it's giving away the Passport service to Web sites for a year. Buy.com Inc. joined the program early and is featured prominently on Microsoft's Web site and in marketing materials. Now, the company plans to plug into more MSN services as they emerge. "I leverage their R&D budget, and I can concentrate on building my own products," says Anthony A. McAlister, buy.com's vice-president for information services.
Microsoft's groundwork is already starting to pay off. Corporate customers who have tested early versions of Windows 2000 plan aggressive rollouts. Ford Motor Co., for instance, plans on using Windows 2000 to handle basic networking and e-mail for about 100,000 employees by June. And the software is finally graduating to handle some of its high-powered projects: a new build-to-order system for Net sales, for instance. "They clearly have what they need to be a key player on the Web," says Ford CIO James A. Yost.
A smattering of dot.coms are jumping on the Windows 2000 bandwagon, too. Search engines Ask Jeeves Inc. and Hotbot.com have just started to switch over--and hotbot.com says its application runs 50% faster on the new software than it did on Windows NT. CenterBeam Inc. in Santa Clara, Calif., has just started offering entire computing systems to companies for a monthly subscription fee. That includes everything from computers and software to Web connections--and all of it based on Windows 2000. Because all of the core software comes from one supplier, the pieces function smoothly together. "It works. It doesn't ever crash. That's a big deal," says CenterBeam Chairman and CEO Sheldon Laube.
CHOICES. In the world of high-end corporate computing, though, Microsoft still has difficulty competing head-to-head with the most powerful Unix systems from Hewlett-Packard, IBM, and Sun that are used for huge banking and brokerage applications and the like. Sun, for instance, is releasing a new version of its Solaris operating system this month that supports up to 64 microprocessors on one computer and allows up to eight computers to be clustered together for extra power and reliability--twice what Windows 2000 will handle. Sun CEO Scott G. McNealy smugly refers to Windows 2000 as "Microsoft's W2K problem" and vows that it will never catch up.
Each of Microsoft's major rivals has its strengths. The Linux operating system is essentially free--and even Microsoft can't trump that. IBM offers companies a vast array of software and unmatched consulting services. Sun has Java, which is becoming the programming language of choice for assembling complex Web sites and projects. And Oracle Corp. is urging Web site developers to use its database software to store and manage everything from Web pages to e-mail--and megasites such as eBay Inc. are going along. "They can build the entire site on the database," says Oracle CEO Lawrence J. Ellison.
Potentially even more threatening to Microsoft, a number of Web sites are being built so they aren't so dependent on the underlying operating system. For example, Sparks.com, an online greeting-card site, uses software from BEA Systems Inc. that allowed it to easily shift from Windows to Sun Solaris in December to gear up for the Christmas rush. It didn't think Windows could handle the load. The switch took just one week, and Sparks.com didn't have to rewrite a line of code. Says BEA CEO William T. Coleman III: "This makes us the platform for the Web, the way Microsoft is the platform for the PC."
Hyperbole aside, the challenge to Microsoft is clear: Web kingpins and corporate computing czars now have a host of alternatives to its technology. The software giant seems to recognize that--and has even begun playing the game a little differently. In one telling example, it embraced an industry standard for communicating about products and services over the Web. And it's building better links between its products and those supplied by rivals.
Still, Microsoft doesn't plan on giving up on the notion of owning and controlling most of the technology it packs into its products. And even though the company has dropped some of its hardball tactics in response to the government's ongoing antitrust case, it's still competing vigorously in dozens of markets. Expect Gates and Ballmer to stop at almost nothing to make Windows rule again--this time as the dominant operating system for the Web.